Too Gig to Fail: Why Regulatory Downside for Gig Companies May Be Overblown

If you spent New Year’s Eve out this year, there’s a good chance you took private transport to and from your destination. With so many people getting loaded by the time the ball drops, it’s one of the most dangerous nights to be on the road, especially if you end up behind the wheel.

Unfortunately, it’s also one of the most expensive times of the year to hail an Uber or Lyft, as a result of surge pricing during peak demand periods. After bouncing around the city of Baltimore on Tuesday evening, I personally dropped around $60 to travel no more than five miles. That’s pretty insane considering I could take a plane to Chicago for about that much.

Not so surprisingly, our driver on our ride home was all smiles and told us he was making a killing that night. I didn’t doubt him for a second considering what we paid for the short ride. In the end, though, the cost was worth it; we got home safe, which is priceless in my book.

The reality is that, despite obviously enormous demand, today’s ride-hailing giants are not without business faults or headwinds. Taxi drivers still stage massive protests as Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) push them out of the market; governments are leaning in with tightening regulations; and drivers are always fighting for a bigger cut.

In my recent takedown of Uber’s stock, I gave three main reasons I think investors should steer away from the stock. Those reasons were as follows: 1) insider selling, 2) dwindling cash reserves, and 3) failed research and development initiatives.

What I didn’t discuss in that takedown, though, was the long list of regulatory hurdles gig companies are facing. Several readers took notice of that omission, reaching out to me either on social media or through email to inquire why I would ignore such a glaring threat to Uber’s business model.

And there’s no doubt these readers are right: regulatory pressure is one of the more prolific threats facing Uber today. The reality, though, is that this threat isn’t unique to Uber, or even ride-hailing companies specifically. In fact, the company has a long list of allies who will help it in the fight against regulation.

For a Common Cause

Over the last two weeks, we’ve seen signs of a loose, but strengthening, alliance between the world’s leading gig companies.

On Monday, Uber and food delivery company Postmates revealed that they were suing California over a new law, Assembly Bill 5 (AB-5), requiring "gig workers" be considered employees rather than independent contractors.

AB-5 was set to go into effect immediately in the new year, but a federal judge in California temporarily halted the law on December 31. The order specifically speaks to the law’s potential effects on the trucking industry, but it’s a major temporary win for gig companies either way.

In addition to its joint lawsuit with Postmates against California, Uber, along with Lyft, won a pair of lawsuits against New York late last month, when a state judge ruled against a new law limiting how much time drivers for ride-hailing services can spend cruising the streets without any passengers.

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The judge called the city’s proposed cruising cap “arbitrary and capricious,” in a big win not just for Uber and Lyft but for the entire gig economy. Still, the city’s mayor’s office says it will be appealing the decision.

Of course, Uber and Lyft are two competing companies, but the point is they have a shared interest in limiting regulations as much as possible. While not publicly spoken, there is an underlying alliance here that reduces the ongoing threat from regulators, or at least the cost of fighting them.

It’s not just Uber, Postmates, and Lyft, either, who are ready to go head to head with local and state regulators. Similar companies like Grubhub (NYSE: GRUB) and DoorDash Inc., as well as individual truckers and individual freelancers across the country, are joining the fight to protect free market principles.

Too Gig to Fail

This data was astounding to me when I first saw it, but according to a 2018 survey by Upwork and Freelancers Union, there are currently 56.7 million freelancers in the U.S. That number represents roughly 35% of the nation’s workforce.

More likely than not, I think it will prove difficult for regulators to establish laws that draw any new and clear lines between third-party contractors and employees, because it is ultimately in the interest of the entire gig economy that things remain as is.

The reality is that, with the exception of Grubhub (NYSE: GRUB), virtually all gig-economy companies remain unprofitable. Postmates, DoorDash, Uber, and Lyft all operate in the red. If you flip the business model on its head and start making them pay employee benefits, there is simply no way they can continue indefinitely (assuming they even can already).

In the long run, that would be bad news not just for gig companies, but for their associated freelancers as well. After all, it’s better to have a job and pay for your benefits out of pocket than to have no job at all.

With gig economy workers and freelancers already contributing around $1.5 trillion (and growing) to the U.S. economy annually, this is an industry that has arguably become too big to fail. If the gig economy continues to grow at its current rate, more than half of the U.S. workforce will be gig workers by 2027.

Simply put, while the regulatory fears for gig companies are serious enough to consider, they are a shared enough concern that no single company will bear the burden on its own. That said, there are plenty of other headwinds and negative aspects facing these companies that investors would be wise to consider.

Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and Topline Trader. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.

Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.

Outside the office Jason is a lover of science fiction and the outdoors. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.

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